Sri Lanka's economy grew 4.2% in Q2 despite pressures from Iran war

COLOMBO: Sri Lanka’s economy grew by 4.2% year-on-year from April to June, the statistics department said on Tuesday, despite three-year-high inflation that has been exacerbated by the impact of the Iran war.

Output from the agriculture sector grew by 2.3% year-on-year in the second quarter, while that of industries expanded 7.3% and services by 2.7%, the Department of Census and Statistics said in a statement.

The island nation grew by 5.1% from January to March.

Growth matched market expectations, four analysts said, but could moderate to 3%-4% in the second half of the year. Full-year growth could be around 3.5%-4%, they said.

“Although oil prices have gone up, we are expecting them to moderate at about $80-$90 per barrel. But higher fuel prices will hit consumption and lead to growth moderating in the second half of 2026,” said Ranjan Ranatunga, vice president of research at First Capital Holdings.

Supported by a $2.9 billion programme from the International Monetary Fund, Sri Lanka is recovering from a severe financial crisis caused by low foreign exchange reserves that sent its economy into freefall four years ago.

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An IMF team is currently in Sri Lanka to conduct the seventh review of the programme to eventually release about $330 million.

The global lender expects Sri Lanka to grow by 3% this year, after posting 5% growth in 2025.

Sri Lanka, which imports all its fuel, is battling soaring energy costs from the Iran war, which has had a spillover effect on inflation that hit 8% in August, from 2.2% in March.

Despite rationing fuel and declaring Wednesdays as public holidays, the island nation had to raise pump prices by about 35% since March.

More price hikes may be in the offing at the end of this month as global prices continue to increase, authorities have warned.

Prompted by higher inflation, the Central Bank of Sri Lanka increased its key policy rate by 100 basis points in May to contain inflation and currency pressure.

Sri Lanka’s rupee has depreciated by 5.7% against the dollar this year.